A Common Misconception About Automatic Enrollment

7/28/17 8:00 AM

Earlier this month we learned that a growing number of 401(k)-sponsoring businesses have started to use automatic enrollment to help nudge workers into being more prudent with retirement preparations. However, some employers remain reluctant to adopt automatic enrollment because they believe that doing so will not provide much of a benefit if most workers simply opt out soon after being automatically enrolled in a plan.

There are even concerns that this plan feature could wind up hurting workers financially in the long-run. How so? Some employers and groups within the financial services industry have argued that participants are less likely to be engaged in the process of planning for retirement if they are enrolled in a plan without any real effort being required on their end. This disengagement should therefore, according to automatic enrollment opponents, lead to low, static contributions that will leave participants ill-prepared for retirement.

A study from Bank of America Merrill Lynch, though, showed that reality does not support such views. Specifically, only 3.4 percent of the workers in the sample that were placed into an employer-provided 401(k) plan by means of automatic enrollment opted out of their plan. Further, opt outs were found to be even less likely for participants placed in 401(k) plans with relatively high contribution rates, and voluntary annual increases to contribution rates were much better among participants automatically enrolled in a plan.

As for the few employees who were part of an automatic enrollment process but ultimately chose to opt out, the report’s authors recommended that plan sponsors consider implementing a re-enrollment strategy. Their reasoning is that “A timing issue or competing financial priorities may have caused them [employees] to initially opt out. An ongoing annual automatic enrollment strategy may be an effective way to achieve higher enrollment success rates given that most employees don’t typically opt out.”